A consumer's preferences over gambles is represented by the expected utility function U (W,, W2, 1 – 1T, T1) = (1 – n)w1 + aw2, %3D where wi is the consumer's wealth if he does not suffer an accident, w2 is the consumer's wealth if he suffers an accident, and is the probability of an accident. Without insurance, the consumer has a wealth of $100 if he does not suffer an accident and a wealth of $20 if he suffers an accident. Assume that r = 1/4. Insurance can be obtained and the premium per dollar of benefit (paid when an accident occurs) is y = 1/3. %3D

A consumer's preferences over gambles is represented by the expected utility function U (W,, W2, 1 – 1T, T1) = (1 – n)w1 + aw2, %3D where wi is the consumer's wealth if he does not suffer an accident, w2 is the consumer's wealth if he suffers an accident, and is the probability of an accident. Without insurance, the consumer has a wealth of $100 if he does not suffer an accident and a wealth of $20 if he suffers an accident. Assume that r = 1/4. Insurance can be obtained and the premium per dollar of benefit (paid when an accident occurs) is y = 1/3. %3D

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

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